Question

1. You apply for a home equity loan. The lender gets an appraisal on your home, showing a value of $183,500. You have a first mortgage with a current balance of $87,435. Based on a 75% LTV ratio, what is the maximum line of credit you can get?

2. Assume you buy 100 shares of stock at a price of $63.75 per share and incur brokerage fees of $200. You own the stock for 5 years and receive dividends of 50 cents per share at the end of each quarter. Immediately after receiving the 20^th quarterly dividend, you sell the stock at a price of $48.63 per share and incur brokerage fees of $200. Calculate your rate of return. (IRR)

Answer 1

1) Total Loan Available = 183,500 x 75% = $137,625

Max Line of Credit = Total Loan - First Mortgage = 137,625 - 87,435 = $50,190

2) IRR can be calculated with IRR function on a calculator

CF0 = -63.75 - 200/100 = -65.75, CF1...CF19 = 0.5, CF20 = 0.5 + 48.63 - 2 = 47.13

=> Compute IRR = -0.60% (quarterly)

Annualized IRR = -0.60% x 4 = -2.40%